Introduction: On the evening of August 26, after the US stock market opened, Pinduoduo's stock price plunged 30% intraday, its biggest intraday drop since October 24, 2022. As an e-commerce platform known for low prices, Pinduoduo is renowned for its strong organizational and execution capabilities, but it has also sparked controversies over its relationships with suppliers and employees. Is Pinduoduo's low price improving industry efficiency or squeezing suppliers to death? Nevertheless, it remains China's fastest-growing e-commerce platform. At the same time, in the second half of this year, a large number of wholesale supermarkets and discount supermarkets have begun to emerge rapidly in various regions. The term 'hard discount', after media education, has become a trend and a lifeline for all small and medium-sized traditional supermarkets, even tea beverage brands are entering the hard discount sector. The hard discount model invented by Germans has been carried forward in China.

The development of China's retail industry has gone from one extreme to another. Low price seems to have become the only way out for 'Chinese-style retail'.

Retail Industry Stratification Structure

The emergence of the discount format has also been accompanied by controversy. Although I have always believed that China has not entered an era of full discounting, when I received this topic, we still need to be clear: do not underestimate that at the current stage, low price still plays a major role in the minds of most Chinese consumers.

China is not entering an era of full discounting, but rather an era of further consumption stratification, except that Chinese-style consumption stratification is a vertical stratification with price as the core.

Consumption stratification is to some extent an inevitable law of economic development. In an era of relative material scarcity, or in a period of insufficient production capacity, consumer demand is actually unified because choices are relatively few. When an economy enters a mature cycle, consumers begin to show consumption stratification.

Due to the rapid growth in the variety and quantity of goods, different consumers, based on their own economic capabilities, demand preferences, and cultural backgrounds, begin to show differences in purchasing behavior.

Consumption stratification unfolds from two dimensions: horizontal stratification and vertical stratification.

The stratification of the retail industry has actually completed this historical process in many mature countries. The most typical country is Japan, where Japanese retail peers have found their own ecological niches through more refined positioning adjustments.

Japanese-style Retail Stratification

Here we analyze Japan's social consumption stratification structure and retail industry structure.

Today, in Japan's supermarket retail industry, about 5% of the share belongs to premium supermarkets, 80% to food supermarkets, and about 15% to discount supermarkets. Japan's premium supermarkets are represented by Seijo Ishii, Bio c' Bon, Meidi-ya, Ikari, etc. Food supermarkets are represented by Life, Aeon, Yaoko, etc. Discount supermarkets are represented by Gyomu Super, OK Super, TRIAL, LAMU, etc.

As shown in the figure below, Japan's retail industry has entered a state of extreme segmentation and stratification.

It should be noted that the premise of Japan's population stratification is that the wealth and income differences across Japanese society are very small. Japan is currently one of the most income-equal developed countries in the world. There are many reasons for this, including the lifetime employment system, balanced income levels and housing prices, and the National Income Doubling Plan of the 1960s, which has led to very small urban-rural income gaps in Japan today.

This is vastly different from China's national conditions.

Japan does not have urban-rural differentiation, and regional differences are extremely small. In other words, due to generally higher incomes, Japan's consumption stratification behavior is more related to cultural/social value identity, and less related to income.

Therefore, today's Japanese population stratification is more based on age, interests, culture, and social cognition, such as otaku, fujoshi, herbivore men, carnivore men, losers, hikikomori, Gyaru, salarymen, etc. We can call Japan's consumption stratification structure a horizontal consumption stratification.

Under this consumption stratification structure, the result is that Japanese supermarkets have shifted more towards food supermarkets.

The situation that Chinese traditional supermarkets face today has also been encountered by Japanese retail peers, but their focus has been on adjusting product structure. For example, with intensifying competition, many traditional supermarkets found that selling non-food items could no longer maintain competitiveness, so supermarkets began to optimize towards food.

In the 1990s, Japanese general merchandise stores began to gradually reduce the proportion of non-food items and increase the sales area and variety of food products. For example, Aeon is a typical example of shifting focus from general retail to food retail. Many supermarkets attracted more customers by expanding fresh food and prepared food offerings, and introducing more imported and organic foods.

In addition, they also upgraded store services, such as expanding refrigerated and frozen food sections, setting up open kitchens, and providing cooking demonstrations, to enhance the shopping experience and customer loyalty.

Therefore, the competition among Japanese supermarkets is not primarily based on price, but on improving service and quality without sacrificing price. Of course, this is also related to the cognitive level of Japanese consumers.

  1. Japanese people believe that saving is not only about lower prices, but also about eating less but with higher quality.
  2. Due to historical and cultural reasons, Japanese culture has a deep respect for food, forming a unique food culture, which is also the basis for most traditional Japanese supermarkets to transform into food supermarkets.

At the same time, we can also look at why Japanese supermarkets have not fully turned to discount supermarkets.

Let's look at the positioning of Japan's major discount supermarkets. I think they can be roughly divided into three categories:

  • The first category is the locally grown discount model in Japan. Lopia, Hanamasa, Don Quijote, Gyomu Super, OK Super, TRIAL, Beisia
  • The second category is the European-style hard discount model. LAMU, Sundi
  • The third category is the B+C wholesale supermarket model. Takagi Wholesale Supermarket, ABS Wholesale Supermarket

Except for the third category, these discount retail formats all have rich fresh food categories, and for most of them, you wouldn't even think they are 'low-price supermarkets'.

Because Japanese society's understanding of 'frugality' and demand for 'quality' are different from China, and Japan is a developed country with small income differences, Japan has not developed truly low-price discount supermarkets. The prepared food and fresh food in Japanese discount supermarkets, if placed in China, you might even think they are premium supermarkets.

This is inconsistent with the current stage of development of discount retail formats in China.

Chinese-style Retail Stratification

China's consumption stratification is more evident in terms of geography and income distribution.

China can be roughly divided by region level as follows:

  • First-tier cities: about 100 million total population, per capita disposable income of about 80,000 yuan. Equivalent to the income level of Spain and Taiwan. Main retail formats: KA supermarkets, BC community supermarkets, premium supermarkets, convenience stores, wet markets, platform e-commerce, instant e-commerce, community group buying.
  • Second-tier cities: about 300 million total population, per capita disposable income of about 60,000 yuan. Equivalent to the income level of Portugal and Greece. Main retail formats: KA supermarkets, BC community supermarkets, premium supermarkets, convenience stores, wet markets, platform e-commerce, instant e-commerce, community group buying.
  • Prefecture-level cities: about 200 million total population, per capita disposable income of about 50,000 yuan. Equivalent to the income level of Poland and Croatia. Main retail formats: KA supermarkets, BC community supermarkets, convenience stores, wet markets, platform e-commerce, community group buying.
  • Counties and towns: about 300 million total population, per capita disposable income of about 30,000 yuan. Equivalent to the income level of Thailand and Malaysia. Main retail formats: BC community supermarkets, convenience stores, wet markets, platform e-commerce, community group buying.
  • Rural areas: about 500 million total population, per capita disposable income of about 20,000 yuan. Equivalent to the income level of Mexico and Turkey. Main retail formats: mobile vendors, mom-and-pop stores.

In comparison, Japan's per capita disposable income is about 150,000 yuan, equivalent to the level of China's first-tier city inner ring (Shanghai's inner ring per capita disposable income is about 120,000 yuan).

Therefore, many people compare today's China with Japan, but such comparisons are not very meaningful.

Considering the current per capita disposable income level of most Chinese people, consumers' overall purchasing decisions will place more emphasis on price-related factors.

Consumers in first- and second-tier cities will show more differentiation in cultural and social cognitive aspects, while consumers in the inner ring of first-tier cities can reach the consumption maturity of developed countries.

Thus, we call China's consumption stratification structure a vertical consumption stratification structure.

So we say that Japan's consumption stratification structure is a diamond shape, while China's is a pyramid shape.

China's per capita income level, consumption habits, and education level determine its pyramid-shaped structure.

That is, the base of China's consumption stratification is the prefecture-level cities and below, including counties, towns, and villages. Its basic characteristics are:

(1) The 'fragmentation' and 'community-oriented' nature of the retail industry;

(2) Consumers' high price sensitivity.

The top of China's consumption stratification is the high-line market represented by first- and second-tier cities. Its basic characteristics are:

(1) The 'fragmentation' and 'community-oriented + centralized' nature of the retail industry;

(2) Consumers pay attention to quality and individuality while focusing on price.

This vertical consumption stratification structure determines that in the vast lower-tier market represented by counties and towns, the discount format will exert tremendous power. China's vigorous retail industry transformation may surpass that of any country in history.

It is foreseeable that more traditional retail and distributor groups will continue to enter the market in the future, and I will continue to study and observe industry changes. Welcome friends who are investing in this wave to connect with me.